Google price fascination has eerie ring

Commentary: Stories recall the days before Cisco slid

By

JohnShinal

SAN FRANCISCO (MarketWatch) - During the second week of February, 2000, technology reporters who regularly covered Cisco Systems Inc. had two stories on their minds.

The first was the company's quarterly earnings report, which like all Cisco earnings reports during the tech boom would produce a profit number that was either equal to or a penny above the expectations of Wall Street analysts.

The other story was less typical. Alerted by East Coast editors who get paid to notice such things, those of us who covered Cisco
CSCO, -4.02%
from Silicon Valley had our eyes on Cisco's market cap.

The reason? Cisco's meteoric stock price rise -- it had doubled in less than six months -- had placed it on the verge of overtaking General Electric
GE, -1.39%
as the world's second-most valuable public company.

Sure enough, on the ninth day of the second month of the third millennium, Cisco shares -- boosted by another predictably-stellar earnings report -- jumped more than $7 to trade at $132.81, giving the networking giant a market worth of $455 billion.

That eclipsed GE's paltry $449 billion, even though the media/electric/financial conglomerate's 2000 sales were six times that of Cisco's, and left Cisco second in market cap to Microsoft Corp.'s
MSFT, -1.70%
$559 billion.

In the eyes of investors Cisco, which provided Internet equipment to a world rapidly embracing the Internet, could do no wrong.

The fascination with Cisco's market cap had an uncanny echo this week in the dozens of stories on Google's flirtation with a $300 share price.

The interest reached all the way across the Atlantic, with the British Broadcasting Company reporting that Google's market cap eclipsed that of Time Warner,
TWX, -0.30%
making it the most valuable media company, if only briefly.

The operative word in that sentence is "briefly." Google's stock price, after coming within two American quarters of $300, clanged off that level like a led (sic) zeppelin (to use a phrase first coined by The Who's late drummer, Keith Moon.) The stock settled the week at $282.50, or 232% higher than its August IPO price of $85.

Like Cisco before it, Google
GOOG, -1.72%
has what the world wants. It's in the enviable position of dominating the business of keyword search advertising at a time when consumers, small businesses and large corporations are embracing the online advertising trend.

It's a very profitable business, as most everyone from San Francisco to London now knows. In fact, Google's expected 2005 profit of $5.17 a share dwarfs the best efforts of Cisco, which has never earned more than 70 cents a share in any fiscal year. During the boom times of 2000, Cisco earned just 36 cents a share for the year ending in July.

Given that Cisco shares traded as high as $80 a share in March of 2000 (or $160 a share, excluding a stock split), investors were willing to pay as much as 220 times expected earnings for the pleasure of owning the stock.

Judged by that yardstick, Google is relatively cheap. Even at $300 a share, the new darling stock in an industry which -- like Hollywood -- always needs a star, the company is trading for "just" 58 times its expected year earnings.

Perhaps that's why Wall Street analysts have been tripping over each other to boost their price targets on Google, much the way Cisco analysts did five years ago.

And Google may indeed keep rising, even to the $350 price target some analysts have pegged for it. Cisco climbed for another six weeks after it surpassed GE on its way to an all-time high in late March of 2000. In fact, Cisco's epic climb -- which turned many a rank-and-file employee into a millionaire -- lasted for nearly a decade.

Perhaps Google's run will last as long. But those Google investors who think the stock won't eventually come back to earth should peruse a Cisco 10-year stock chart that covers the period 1995 to 2005.

The chart looks like a mountain landscape dominated by a peak in the middle. The ascent the stock made between late 1998 and March of 2000 was indeed breathtaking -- representing an eight-fold rise -- as investors who'd convinced themselves that Cisco could do no wrong were willing to pay P/E multiples for the stock that became absurd -- and unsustainable.

The descent was even steeper, and less than a year after it peaked along with the broader stock market, Cisco was laying off a large chunk of its workforce.

It's hard to see that happening any time soon with Google. But at some point, the valuation will become more than even its rich business model can support. When that happens, look out below.

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